Some estimates of income elasticity of demand

My previous blog looked at estimates of own price elasticity of demand. Now the focus moves on to estimates of income elasticity of demand. In a sense income elasticity should be easier to measure than price elasticity of demand because there is more variation in income than price. But I actually found it a lot harder to come by income elasticicities in the literature.

And it was particularly difficult to get a nice spread of elasticities. Ideally we want some examples of luxury goods (with elasticity more than 1), normal goods (more than 0) and inferior goods (less than 0). The large majority of the examples I could find fitted in the 0.3-0.8 range. My rough interpretation of the literature is that 'simple' estimates tended to suggest things like eating out and health care were highly income elastic but more detailed work has lowered the numbers down.

It was also the case that goods you might think of as luxuries where not. This could just be a self-selection issue. For instance, organic food seems to be income inelastic for those that buy organic food. But, I'm guessing those that buy organic food are relatively well-off. Drug addiction seems another variant on this theme with a study by Petry finding that demand is income elastic for addicts (and 0 for non-addicts). Which is illustrates the more general point that one person's luxury may not be another's meaning it is difficult to find goods that are luxuries 'on average'.

Anyway, here are the numbers I settled on:

My earlier post had an income elasticity of Israelis going on vacation of 0.28. Yet a study by Maloney and Montes-Rojas puts the elasticity for going to the Caribbean at 2.02. These are not necessarily inconsistent if we think of the Caribbean as a luxury destination. So, going on holiday is normal but going somewhere further afield is luxury.

I have already mentioned the study by Petry where I got the cocaine number from. I will also mention a study by Celements and co authors that got an income elasticity of 1.3 for marijuana. Interestingly tobacco and alcohol come in a lot below 1 and so there is potentially an interesting story to be told there.

My search for luxury goods eventually paid off with a study of books by Ringstead and Loyland. They were using data from Norway before 2000 and so I'm not sure how representative that is of modern demand for books. But, it is easy to imagine that books are even more of a luxury good now that other sources of entertainment have a low marginal cost.  

A study by Costa-Font and co-authors review studies on health care and find an elasticity between 0.4 and 0.8. Crucially this means the health expenditure is not a luxury good - as many previously argued. A study of housing in Spain by Fernandez-Kranz and Hon - with plenty of comments on the literature - came up with a number between 0.7 and 0.95.

Some numbers on fuel consumption are provided in a review by Goodwin, Dargay and Hanly. For electricty use there is a German study by Schulte and Heindl that gives detailed estimates:

We then get into food. For an interesting discussion on measuring food elasticites the review by Cirera and Masset is recommended. But that does not give much by way of 'simple' numbers. For studies in Europe you can look at the references in my earlier post. A study by Kumar and co-authors gives some comparative numbers for India. You can see how income elasticity varies by income group meaning that Engel curves are definitely not straight lines. 

For food there is a lot more data out there. For instance a study by Kassali and co-authors looks at rice demand in Nigeria and gets similar numbers to that in India. This can then be compared to numbers in Europe. So, here the numbers are a bit more definitive, but also fairly consistent in showing that most food items are in the range 0.2-0.7. Finally, the number I give for organic food is taken from a study by Zhang and co-authors in the US.